Hot Option Plays: Stock Market Averages Attempting To Rebound Midday

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Cusick’s Corner 11-09-2012
The market pulled back in the pre-market, then opened weak and now back in the positive in spite of France’s news and the continued uncertainty of the Fiscal Cliff. Buying was hard to do but the bid did strengthen into the midday and the headlines crossing at this hour are continuing to drive this upside action. The Energy sector, XLE, has continued to run with the market, so it will be interesting to see if those gains hold going into the weekend. I have to run and catch a flight but will get to the After Hours when I land.

Stock market averages are attempting to rebound after two days of steep losses, but the underlying tone of trading remains cautious through midday. Economic news seemed to ease some of the recent anxiety about the economic outlook after the University of Michigan reported that its index of consumer sentiment rose to 84.9 in mid-November, from 82.6 last month and better than the 83.0 that was expected. A separate report showed Wholesale Inventories up 1.1 percent in September and .7 percent more-than-expected. And it was reported early in the day that the Trade Balance narrowed to $41.5 billion in September, from $43.8 billion and much narrower than the $45.4 billion that was expected. Overall, the data might have eased some of the anxiety about the upcoming fiscal challenges facing political leaders in Washington. Overseas, Asia’s markets finished mostly lower, but trading has turned mixed through much of Europe. The euro is down another .2 percent and now trades for 1.272 against the buck. Crude oil edged up 50 cents to $85.59 and gold gained $7.5 to $1733.5. On Wall Street, the Dow Jones Industrial Average is up 47 points and the NASDAQ added 26 points. CBOE Volatility Index (.VIX) is off .51 to 17.98. Overall options volumes are running at a good pace, but also reflect the cautious underlying sentiment, with 3.8 million calls and 4 million puts traded across the exchanges through 11:40am ET.

Bullish Flow
Sirius Satellite (NASDAQ:SIRI) adds 9 cents to $2.76 and ticking higher after a total 8 percent drop suffered during the first four days of the trading week. One player in the options market traded 25,000 Jan 2.5 put on SIRI at 11 cents per contract when the market was 11 to 12 cents and 25000 Jan 3 calls traded for 13 cents when the market was 11 to 13 cents. With the stock roughly midway between the two strikes, the combo appears to be a “risk-reversal”, in which downside puts were sold to finance upside calls. If so, a 2 cent debit was paid and the investor is positioned for SIRI to move higher through the January term, which is in 7 weeks. They’re probably a willing buyer of the stock at $2.5 and therefore writing the 2.5 puts.

NII Holdings (NASDAQ:NIHD), a Reston, VA wireless company, is down 23 cents to $6.25 and has suffered a 5-day 19.1 percent losing skid on the week. Options volume on the stock today is almost 6X the daily average, after roughly 11,000 calls and 2,620 puts traded in NIHD. The top trade is an 8,610-lot of Dec 8 calls for 20 cents per contract when the market was 10 to 20 cents. 10,010 traded against 1,174 in open interest. Some investors might view this week’s steep drop in the stock as an opportunity, but rather than buying shares, they are taking positions in options that give the right to buy or “call” the stock for a set price [[strike]] through a fixed period of time [[expiration]].

Bearish Flow
JC Penney (NYSE:JCP) drops $1.17 to $20.52 in heavy trading of more than 25 million shares on the heels of its latest report and options volume on the retailer is running nearly 5X the daily average. 59,000 calls and 115,000 puts traded in JCP so far. The largest trade surfaced in midday action when an investor sold 14,000 Jan14 $13 puts on the stock at $1.66 and bought 14,000 Jan15 $13 puts for $2.95. Looking at the trade history and open interest of both contracts, the time or “calendar” spread, for $1.29, appears to be a roll. That is, the investor had an open position in Jan $13 puts that expire in the first month of 2014. They sold-to-close that position and opened a new one in $13 puts that expire in 2015. A shareholder might have initiated the trades as part of a longer-term hedging (disaster insurance) strategy on JCP. $13 puts on JCP are 36.6 percent out-of-the-money.

iShares EAFE Fund (EFA) is up 22 cents to $53 and options volume on the exchange-traded fund includes about 110,000 puts and 31,000 calls, which is 2.5X the daily average for the fund. The top trade is a three-way spread, in which the investor sold 23,000 November 51 puts on EFA at 78 cents, bought 23,000 January 50 puts for $1.07, and sold 23,000 January 47 puts at 51 cents. In this strategy, the investor appears to be exiting a position in the November puts that expire at the end of next week, while opening a new position in a January put spread. EFA is a fund that holds shares from Europe, the Far East and Australia. An investor might be active in the downside puts on the ETF due to concerns about the outlook for Europe’s equity markets, as well as other markets in the region, through yearend.

Unusual Volume
JC Penney (NYSE:JCP) options volume is running 3.5X the (22-day) average, with 138,000 contracts traded and put volume accounting for 59 percent of the volume.

iShares EAFE Fund (EFA) options volume is 2X, the average daily, with 133,000 contracts traded and put volume representing 81 percent of the activity.

Sirius Satellite Radio (NASDAQ:SIRI) options volume is running 2.5X the average daily, with 63,000 contracts traded and call volume accounting for 58 percent of the activity.

Increasing options activity is also being seen in Disney (NYSE:DIS), Molycorp (MCP), and Sandridge Energy (NYSE:SD).

Implied Volatility Mover
Implied volatility in the options on MolyCorp (MCP) is moving higher, as shares of the rare earth materials company slide on earnings news. The stock is down 55 cents to $8.13 in very brisk trading of 17.5 million shares. Meanwhile, options volume is running 4X the daily average. 51,000 puts and 26,000 calls so far. Weekly 8.5 and 9 puts , which expire after today, are the most actives in MCP. November 7.5 and 10 puts are the next most actives. Some investors seem to be bracing for further gyrations in the stock, as implied volatility in MCP Is not seeing the typical post-earnings “crush”. Instead, 30-day IV is moving up 16 percent to 105.

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